Riaz Haq writes this data-driven blog to provide information, express his opinions and make comments on many topics. Subjects include personal activities, education, South Asia, South Asian community, regional and international affairs and US politics to financial markets. For investors interested in South Asia, Riaz has another blog called South Asia Investor at http://www.southasiainvestor.com and a YouTube video channel https://www.youtube.com/channel/UCkrIDyFbC9N9evXYb9cA_gQ

Sunday, May 5, 2013

Anti-Musharraf Judge Deals Serious Blow to Tax Collection in Pakistan

In yet another egregious example of increasing judicial activism, Islamabad High Court's Justice Shaukat Aziz Siddiqui, the judge who also ordered Musharraf's arrest, has suspended Pakistan's top tax collector Arshad Hakeem. Hakeem was working on an ambitious technology-based project to go after powerful tax dodgers in the country.

In a country where the rich and the powerful pay little or no tax, Ali Arshad Hakeem became "a hated man" in just seven months after his appointment as FBR chairman, according to a report in the UK's Telegraph newspaper. Coming from IT and business management background Hakeem put in place a database designed to monitor the spending habits of millions of people, and calculate how much tax they owed.
At the click of a mouse, he could look up details of the elite's holiday habits, electricity bills and bank accounts, complete with photos, addresses and vehicle details, said the newspaper.

By linking government databases on cars, imports, exports and sales tax among others, he built a powerful tool for the Federal Board of Revenue (FBR) that could identify individuals and companies which were not paying their fair share. For income tax, his team fed 1,700 factors into a model which calculated how much was owed.

Pakistan tax-gdp is among the lowest and its tax policies are among the most regressive in the world. Direct taxes make up less than 3.5 percent of GDP, with wide ranging exemptions to powerful segments of society coupled with governance issues at Federal Board of Revenue, according to former finance minister Shaukat Tarin. The bulk of the tax receipts are collected in the form of sales tax, placing the heaviest burden on the lower-income people who spend almost all of their income on their basic needs.

Hakeem's efforts to change the situation and collect from the rich and powerful came to a grinding halt last month when Justice Siddiqui suspended Mr Hakeem for alleged violations of appointment rules.

Other damaging examples of economic judicial activism include cancellation of Pakistan Steel Mills privatization, annulling of Reko Diq mining contract and voiding of rental power deals with foreign investors.

Since the cancellation of Pakistan Steel Mills privatization deal in 2006, PSMC has suffered huge losses that cost the taxpayers tens of billions of rupees--Rs 26.5 billion in 2009, Rs 11.5 billion in 2010, Rs 11.4
billion in 2011 and Rs 21 billion in 2012. Had Prime Minister Shaukat Aziz's government been allowed to proceed with privatization in 2006, the PSMC would have been a significant contributor to the national exchequer rather than a huge drain on the public treasury. The money saved could have been used to fund education, healthcare, energy and infrastructure projects in the country.

Similarly, the Supreme Court has intervened and scared away foreign investors by its decisions in Reko Diq and Karkey rental power company. Had Reko Diq been allowed to continue, it would have represented a huge $3.3 billion foreign investment in Pakistan's Balochistan region.

Umar Cheema, a journalist and author of the report that showed how few politicians pay tax, told Telegraph's Rob Crilly that anyone attempting reform risked being brought down.
"He made people realize the FBR was doing something under his watch, even though he was not there for very long" he said.

"This quiet, technocratic revolution came to a juddering halt last month, when Mr Hakeem was suspended by judges over allegations that his appointment breached government rules that demand each job be filled from a shortlist of three."

So the real issue is how he was appointed. His good work is to be commended, but government appointments must follow the rules and regulations. The process that led to his appointment was challenged, and he was suspended pending a determination of whether his appointment followed rules or not.

Pakistanis need equitable taxation to ensure EVERYONE pays their fair share, including the rich and the powerful who currently pay little or no tax.

The rich in EVERY country pay disproportionately less taxes.Don't be so naive!

In the US the top 1% pay LESS tax than the bottom 99% as percentage of income.While not so spectacularly in your face its much the same everywhere,its a fact of life.High taxes only screw the upper middle class the most educated and productive section of any society!

Anon: "In the US the top 1% pay LESS tax than the bottom 99% as percentage of income.While not so spectacularly in your face its much the same everywhere,its a fact of life."

You are wrong. The US taxation system is quite progressive.

The top 1% of US taxpayers pay almost as much in federal income taxes as the entire bottom 95%, and half of that bottom group paid no taxes at all in 2010.

According to new IRS data, the 1.35 million taxpayers that represent the highest-earning one percent of the Americans who filed federal income tax returns in 2010 earned 18.9% of the total gross income and paid 37.4% of all federal income taxes paid in that year. In contrast, the 128.3 million taxpayers in the bottom 95% of all U.S. taxpayers in 2010 earned 66.2% of gross income and that group paid 40.9% of all taxes paid. In other words, the top 1 percent (1.35 million) of American taxpayers paid almost as much federal income tax in 2010 ($354.8 billion) as the entire bottom 95% of American tax filers ($388.4 billion), see chart above. And it’s that group of top income earners (with income above $221,000 in 2010 to be in the top one percent), that Obama and the Democrats want to tax even more.

Further, there were more than 58 million Americans in 2010 who had tax returns with a zero or negative tax liability, so about half of the bottom 95% of American “taxpayers” paid nothing or got a tax refund.

^^Anonymous: "The primary challenge in to spend efficiently not to tax more"----

Ameen!

Finally, we have a South Asian who understands the FIRST PRINCIPLE of sensible government.

Almost everybody in South Asia seems to think that the solution to every problem lies in 'more government taxing & spending', but very few actually point to the massive waste (inefficiency) inherent in all government spending.

Making government spending more efficient should be the first step. Only then should 'taxing & spending more' be considered. At the very least, they should both be considered simultaneously.

After all, it makes little sense to to pour more and more precious water into a bucket with a gaping holes in it. We should fix the holes first, then we can discuss pouring more water in it....

HWJ: "That only refers to income taxes (individual or corporate) collected by the Federal government. The bottom-group pays huge sales taxes, which are collected by State governments in the US."

That's where Pakistan has a huge problem.

Direct taxes make up less than 3.5 percent of GDP, with wide ranging exemptions to powerful segments of society coupled with governance issues at Federal Board of Revenue, according to former finance minister Shaukat Tarin. The bulk of the tax receipts are collected in the form of sales tax, placing the heaviest burden on the lower-income people who spend almost all of their income on their basic needs.

^^ANONYMOUS: "India is 20% tax to GDP on top of that the govt runs a huge fiscal deficit boosting government spending to 30% of GDP what has India achieved?

Productive spending i.e education infrastructure healthcare even defence and R&D is not more than 10% the rest is debt servicing and subsidies expenditure!"----

You make good arguments. However, you should consider presenting actual data for readers to chew on.

Here are the data....

1) Goto http://alturl.com/66xbm2) Goto PUBLIC FINANCE> CENTRAL & STATE GOVT FINANCE (COMBINED)3) Click on the Report entitled "Combined Receipts and Disbursements of the Central and State Governments"4) Focus on the last few COLUMNS in the report.

Moving from deficits to DEBT...1) Go back to http://alturl.com/66xbm2) Goto PUBLIC FINANCE> CENTRAL & STATE GOVT FINANCE (COMBINED)3)Click on report entitled "Select Debt Indicators of the Central and State Governments"

Looking at debt as % of GDP, we can see that DESPITE these large deficits in recent years, the DEBT/GDP ratio has consistently GONE DOWN from its peak in 2003-04.

Unlike Western countries whose Debt/GDP ratio began to explode after the 2008 crisis, India's ratio has KEPT DECREASING regardless of the deficit.

Quesiton for 'Anonymous': Why do you think that is? Why this difference between the West and India, even when both are running high deficits?

Your blog is full of PRAISE for Ayub (sixties), Zia (eighties) & Musharraf (aughties) for the rapid socioeconomic growth during their regimes and highlights the poor performance of democracy before and after their rule.

But is there a dark side to this army-led development as your friend Samandtar argues?

What is your REAL view of the Khakis? On the whole (i.e. net of all things considered) were the reigns of Ayub, Zia, Mush GOOD or BAD for Pakistan?

Please take a stand and stick to it--otherwise you will end up confusing your young readers.

Here is a LIST of countries sorted by Government Spending as % of GDP:

http://alturl.com/8m5ya

NOTE: Only federal, central or union government spending is listed. State, provincial or local government spending is NOT included.

For example, Pakistan has negligible Subah taxes because of the "one unit" original structure. So all Subah spending shows up in our federal accounting. This is why Pakistan appears to spend more than India, where their States independently tax and spend money that does not show up in their federal accounting.

So in special cases like India and US where their States have independent tax-and-spend rights, we should make the adjustment as follows....

India: 17.5% Central Spending + 9% State Spending= 26.5% of GDP Total

US: 23.6% Federal Spending + 9.6% Stat Spending= 33.2% of GDP Total

Here is another more comprehensive (fed plus state) list including deficits (borrow and spend):

HWJ: "What is your REAL view of the Khakis? On the whole (i.e. net of all things considered) were the reigns of Ayub, Zia, Mush GOOD or BAD for Pakistan?"

Pak military governments have consistently provided much better governance than the politicians. They have grown the economy and invested more in education, health care, energy and infrastructure.

Though the generals are initially welcomed by the people after each coup, they lack popular legitimacy which makes it difficult for them to stay in power for long and they are thrown out by the people after 8-10 years to be replaced by elected politicians.

In my view, the generals represent a lesser evil on the road to real democracy with a large educated middle class which can choose better political leaders for improved governance in the country.

ASEAN and East Asian nations are good examples of nations where generals and dictators have transformed their countries from patron-client agrarian societies to industrialized democracies.

Quesiton for 'Anonymous': Why do you think that is? Why this difference between the West and India, even when both are running high deficits?

Simple maths India is growing at 6% so the GDP increases faster than government spending is so the debt to GDP ratio is improving.

Still Indian political class like all political classes in the third world and to some extent even in the first world cannot resist the temptation of using government finances to win elections atleast half of government spending is on absolutely unproductive things like loan waiver to rich farmers,free electricity,fertilizer subsidy,etc etc which only make sense from a political perspective.

As a principle till societies reach scandinavian levels of political/societal maturity giving more to government is almost always a bad idea!

The Scandinavian countries are not as much "mature" as they are essentially homogenous tribal societies. Japan is also like that.

Homogenous tribal societies are inherently more egalitarian than heterogenous civilizations.

For example, socialism (government spending) has always been resented in the US because the majority feels that the "negroes are living off the white man's dime". No such concept has historically existed in the Scandinavian countries as they have never had the "other" by virtue of their homogeneity.

But now, that is changing even in Scandinavia. With the rapidly rising Muslim (middle east, north africa) population in those countries, you increasing hear of "they" (i.e. Muslim foreigners) are taking from "our" (i.e. native people) money. So a backlash against socialism is to be expected with rising diversity in those scandinavian countries as well.

As for India & Pakistan, no matter how much their societies "mature" socio-economically, they will NEVER become like the Scandinavian countries.

In Pakistan, for example, the more developed Muhajirs will resent government handouts to the less developed Sindhis. The Baloch will resent the Punjabis for benefiting from "their" resources. The Sindhis will resent the Punjabis hogging the States's resources. The Rajputs will cry foul about the Jats. The Hindko speakers will whine about Pashtun domination. And so on. Similar things are true of India. This is just human nature and is seen in all non-homogenous societies.

Therefore, what works in Scandinavia (or has worked so far) MAY work in homogenous tribal countries. But it will NEVER work in diverse societies like Pakistan/India-- no matter how much they "mature".

^^Anon: "Simple maths India is growing at 6% so the GDP increases faster than government spending is so the debt to GDP ratio is improving..."----

Math, yes. Simple, no.

For example, focusing on FY 2011-12 from the datalinks in previous comments:1) India's Debt to GDP was 66% at the START of that fiscal year.2) India ran a deficit of 8.2% of GDP during that fiscal year.3) India's economy grew at 6.5% over that fiscal year.4) And yet, India's Debt to GDP was 65.5% at the END of that fiscal.

Where is your math? The deficit was LARGER than growth, wasn't it? Do how did the Debt/GDP decrease?

Could it be that you are overlooking something ABSOLUTELY CRITICAL?

This is a very common mistake. So it is something for everyone to think about.....

there are many ways of financing the deficit.Borrowing is one of them.

1.Printing money aka quantitative easing.All governments do that to some extent even in normal times.

2.Deferring payments particularly in intra government expenditure.

3.One time sale of telecom spectrum,prime land or natural resorce etc.

But on the whole you will find Indian GDP growth > additional borrowing of government for any 5 year period.

Scandinavian societies are such due to complicated social evolution.The Homogeneous society doesn't really pass scrutiny.Yes homogeneous society is necessary but not sufficient condition for a nordic type socio economic model.

South Korea is very homogeneos but it doesn't have much of a welfare state neither is there any popular demand for it.

Many east european countries are also pretty homogeneous but again not much more than a basic EU mandated social market economic framework is forthcoming.

Where is your math? The deficit was LARGER than growth, wasn't it? Do how did the Debt/GDP decrease?

The anomoly is for 1-2% which could be explained by things such as foreign exchange fluctuations vis a vis foreign debt or retiring of old high interest debt or government financing its expenditure by levying some taxes which are yet to show up in the official figures such as the very complicated taxation on petrol.So when the price of crude rises the govt revenues go up but due to the entangled nature of things don't immediately reflect in fiscal deficit figures.....

^^Anon: "there are many ways of financing the deficit.Borrowing is one of them.

1.Printing money aka quantitative easing.All governments do that to some extent even in normal times.

2.Deferring payments particularly in intra government expenditure.

3.One time sale of telecom spectrum,prime land or natural resorce etc.----

You talk a lot, but you know very little. This is an very common characteristic of the half-educated "New Indian".

Remember that a little knowledge can be a very dangerous thing.

Point 1) IS Borrowing by definition. "Printing money" creates an equivalent liability for the Government. "Printing money" is nothing more than swapping longer-term government bonds for instantaneously-maturing constant-rollover bills (i.e. currency). Anything that creates a liability is, by definition, borrowing.

Point 2) IS also accounted as borrowing as it creates an 'account payable' liability that is recorded as debt and shows up in the accounts.

Point 3) is already recorded as part of capital revenue and is accounted for in the total revenues BEFORE any deficit calculations are done. You cannot finance the deficit by selling state assets, because the deficit is calculated AFTER the proceeds from sales sales have already been accounted for. It is a matter of standard government accounting.

Everything you have written here is based on a very poor understanding of all goverment accounting principles. You are either a poor student, or you have poor teachers, or both.

Please study the subject further before advertising your ignorance.----------

^^ANON: "Scandinavian societies are such due to complicated social evolution.The Homogeneous society doesn't really pass scrutiny.Yes homogeneous society is necessary but not sufficient condition for a nordic type socio economic model.

South Korea is very homogeneos but it doesn't have much of a welfare state neither is there any popular demand for it.

Many east european countries are also pretty homogeneous but again not much more than a basic EU mandated social market economic framework is forthcoming."----

Perhaps malnutrition is affecting your ability to think clearly.

The claim was: "For socialism to succeed, you need a homogenous society".

The claims was NOT: "Every homogenous society has successful socialism".

The claim was that homogeneity was 'neccessary'. Nobody claimed that homogeneity was 'sufficient'?

Therefore, pointing to homogenous societies without socialism (South Korea or Eastern Europe) is IRRELEVANT to the original argument.

Here is what you need to do: Show us an example of non-homogenous or diverse society in which Socialism has worked.

Nawaz Sharif, Pakistan’s new prime minister, will appoint private sector managers to run state companies in efforts to revive an economy starved of investment, say leaders of his party.Mr Sharif, who has been prime minister twice before, launched a similar policy in 1997 when he appointed commercial bankers to run three large public sector banks. All three became profitable and two, Habib Bank and United Bank, were privatised.

The plan faces a backlash from trade unions. Mr Sharif’s aides compared the process to the privatisations in the UK by Margaret Thatcher after she became prime minister in 1979.Sartaj Aziz, former finance and foreign minister and a leader of Mr Sharif’s Pakistan Muslim League-Nawaz, told the Financial Times: “The formula is simple. You appoint good people, you allow them to appoint their people and you empower them. The government helps wherever it can.”

Officials said Ishaq Dar, a confidant of Mr Sharif, would take up his former post of finance minister in the new government.Final results have yet to be declared but business leaders have welcomed a vote that will probably allow Mr Sharif, a wealthy Punjabi steel magnate, to have an absolute majority in parliament without the need for coalition partners.Investors in Pakistan said they were tired of grappling with power cuts of up to 20 hours a day, widespread corruption in public life and an inefficient public sector. Mr Sharif has identified rescuing the economy as his number one priority.A central bank official said public sector companies in power, rail transport and aviation run up huge losses each year amounting to more than 2.5 per cent of gross domestic product. “These are clearly white elephants,” he said.Mian Muhammad Mansha, the Lahore-based owner of a Pakistani conglomerate who is reputed to be the country’s richest man, approvingly quoted a reference to Thatcher as a “modern Joan of Arc” and said Pakistan needed structural reforms similar to hers.“First you need to get all these public sector companies out of government control,” he said. “This will release so much money that they are losing and it will make politics clean.”

The 1997 bank plan saw Mr Sharif’s government dismiss some 20,000 employees who were all given large redundancy payments. The current reform plan may meet resistance not only from unions but from politicians who are used to arranging contracts for their businesses from public sector companies.

“Mr Sharif will have to keep his own politicians under control if he wants his plan to succeed. In the past, many have thrived on patronage,” said Suhail Jehangir Malik, an economist. “Public sector companies are a huge drain on our national economy. Reforming them must be a primary objective for the new government.”The plan is likely to win support from international donors, including the International Monetary Fund, which is expecting to begin negotiations shortly on a new $9bn loan to stave off a balance of payments crisis. Pakistan’s foreign reserves are equivalent to the value of two months of imports.“The problem with Pakistan is both macroeconomic weakness and long-term structural issues,” said one person involved in preliminary talks with the interim government in power over the election period. “Given the severity of the economic problems, we do need to have a government that is going to undertake quite serious economic reforms.”Under a so-called extended fund facility of up to four years, Pakistan would be expected to cut its budget deficit by increasing tax revenues, directing subsidies more accurately towards the poor and introducing policies to encourage foreign direct investment.

Here's an Express Tribune story on the adverse economic impact of activist judges in Pakistan:

Former State Bank of Pakistan governor Dr Ishrat Hussain claims that the country’s economy has suffered as a result of interventions by the Supreme Court in recent years.While addressing the International Judicial Conference’s working group on Saturday, he said the country’s risk profile has been elevated as the investors fear of being embroiled in endless litigation.“Even if the investors overcome procedural hurdles, they are now faced with an additional concern of being dragged into the court over legal lacunas, which adds to uncertainty and unpredictability of investing in Pakistan,” the former central bank chief said.Dr Hussain said that despite fulfilling the requirements, the fear that the country’s courts may take suo motu notice of the transaction, and subsequently issue a stay order, deters businesses from investing in Pakistan.“A large number of frivolous petitions are filed every year that have dire economic consequences. While the cost of such filings is insignificant the economy suffers enormously,” he added.Highlighting SC’s judgments in cases such as, Reko Diq, LNG project and privatisation of Pakistan Steel Mills (PSM), the former SBP chief said the decisions have had a negative impact on the country’s economic development.

About the LNG case, Dr Hussain said the government received several bids but they could not proceed further due to the court’s intervention, adding that there is a need for expeditious disposal of suo motu cases related to economic issues.Similarly, commenting on SC’s judgment in the PSM case, he said the country has not carried out a single transaction of privatisation since the decision.The former central bank chief said the court judgments have instilled fear among the civil servants and political leaders for putting out any public assets for sale to avoid judicial intervention.Lastly, taking a swipe at the judicial activism, Dr Hussain said the court’s interference in the appointments, promotions and terminations was hampering the operations of civil services.Treading a cautious line, the former state bank governor said, “Let me submit with all the humility and without sounding arrogant or offending anyone’s sensibilities, that economic decision are highly complex and its repercussions are interlinked both in time as well as space.”He recommended that laws related to Land Revenue Act needed to be updated, in accordance with modern demands of agro business, industry, commerce, infrastructure, etc.The former SBP chief also stated that the disposal by the banking courts was 23,694 against a total of 68,973 outstanding cases which was lower than the disposal rate by all special courts and Administrative Tribunals.

Ali. How do you compare the economic policies of different civilian and military regimes in the recent past?

Husain. I would say 2000–2002, when we had a cabinet of technocrats, was the best period of economic management in Pakistan’s history. It was during that period that all the tough reforms – including those in the structure and administration of taxes – were introduced. The period between 2003 and 2006 was reasonably good because the momentum for growth had been created earlier. International confidence in Pakistan’s economy was high and the Foreign Direct Investment flows were at their peak.

The turning point came in 2007, with the announcement of elections, judicial issues and the Lal Masjid episode. In 2008, there was tension between Musharraf and the army on the one hand, and the new civilian government on the other. The government in power between 2008 and 2013 did not pay much attention to economic management. It changed five finance ministers and five governors of the central bank. When the ship is in turbulent waters, you need strong hands on the wheel to bring it to shore safely. We had an economy in trouble between 2008 and 2013 but there was no one minding the store. That created a lot of problems. We did not even implement conditionalities of the International Monetary Fund loan programme.

The current government at least has a very clearly designated steward of the economy. You may disagree with him, but at least we all know somebody is minding the store.

Ali. Why can’t we catch tax evaders?

Husain. When Abdullah Yusuf was heading the Federal Board of Revenue (FBR), tax administration was doing well. The moment the government removed him, the whole process turned topsy-turvy.

Also read: Altaf Hussain: Politics on mute

Let me give you a very specific example. The FBR had a merit-based selection process for key postings in the customs and income tax departments. Those selected were given double the usual salary. As a result of this policy, very good people were selected as regional tax officers and they started generating additional revenues.

The new government came in 2008, and the FBR officials who were not hired for those posts went to politicians and said that they were being treated unfairly. The government doubled the salaries of all the officials irrespective of their merit or performance and the old culture was restored. If the merit-based, performance-related evaluation process and compensation system was allowed to continue, I can tell you things would have improved.

The Reko Diq project sits in the restive province of Balochistan, which shares a border with Afghanistan and Iran, and was estimated to have cost more than $3 billion to develop.

Barrick Gold Corp. says an international trade tribunal has ruled in its favour on a dispute over a multibillion-dollar mining project in Pakistan.

The company, along with joint venture partner Antofagasta plc, took the Pakistani government to the World Bank’s International Center for Settlement of Investment Disputes after the country denied a mining lease for the Reko Diq copper-gold project in 2011.

Barrick says the tribunal rejected Pakistan’s final defence against liability on Monday and ruled the country violated terms of an investment treaty with Australia, where the Tethyan Copper Co. joint venture is based.

The tribunal will start proceedings to determine the size of the damages on March 22 with a ruling expected in 2018, Barrick said.

The Reko Diq project sits in the restive province of Balochistan, which shares a border with Afghanistan and Iran.

Barrick said the Reko Diq project was estimated to have cost more than $3 billion (U.S.) to develop and is one of the world’s largest undeveloped copper and gold deposits.

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About Me

I am the Founder and President of PakAlumni Worldwide, a global social network for Pakistanis, South Asians and their friends. I also served as Chairman of the NEDians Convention 2007. In addition to being a South Asia watcher, an investor, business consultant and avid follower of the world financial markets, I have more than 25 years experience in the hi-tech industry. I have been on the faculties of Rutgers University and NED Engineering University and cofounded two high-tech startups, Cautella, Inc. and DynArray Corp and managed multi-million dollar P&Ls. I am a pioneer of the PC and mobile businesses and I have held senior management positions in hardware and software development of Intel’s microprocessor product line from 8086 to Pentium processors. My experience includes senior roles in marketing, engineering and business management. I was recognized as “Person of the Year” by PC Magazine for my contribution to 80386 program. I have an MS degree in Electrical engineering from the New Jersey Institute of Technology.
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